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Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity by Frédéric Patras, Damiano Brigo, Tomasz R. Bielecki

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Chapter 13

Structural Counterparty Risk Valuation for Credit Default Swaps

Christophette Blanchet-Scalliet

Université de Lyon

Frédéric Patras

Université de Nice and Zeliade Systems

The valuation of counterparty risk for single-name credit derivatives is often based on reduced models where defaults intensities drive the jump-to-default of the counterparty. Whereas efficient and relatively easy to calibrate to credit default swaps (CDS) spreads and market data, we argue that this approach should be supplemented by the structural approach familiar in multiname credit risk (e.g., in the Gaussian copula models or in many widespread credit portfolios risk assessment tools). We discuss Merton-type structural models for counterparty risk, their advantages, ...

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